To track the intended -- and more importantly, unintended -- consequences of policies,market movements,buyout deals and regulatory censure. This forum will map the multiplier effect of what may seem minor events initially but spread out far and wide.

09/22/2010

Even as the US economy plods its way to a slow creeping recovery with occasional spurts of good news, its financial underpinnings are still in turmoil and could create fetters to its growth.

Data put out by Federal Deposit Insurance Corporation or FDIC, the federal risk monitoring agency for financial institutions, shows that 125 banks have failed in US in the first nine months of 2010. And an August 31 second quarter statement by FDIC points to another 829 institutions being on its “problem list” – the highest on radar since March 31, 1993. This figure is a clear step-up from 775 struggling institutions in the first quarter, signalling more pain in the offing.

The agency doesn’t specify the nature of these “problems” or how far out on the edge these institutions could be but such a large number of failing banks – and several more in danger of going under – are enough to prick any notion of a quick, painless turnaround.

To boot, this year’s tally is expected to exceed last year’s figure of 140 bank failures. There have been 317 bank failures in all in US since 2000, of which over four-fifths have occurred in 2009 and 2010 alone.

The economy for now is a mixed bag of news. Those seeking unemployment benefits, for the week ended September 11, unexpectedly dropped by 3,000 to 450,000 -- the lowest level in two months – according to a Labor Department report on Sept. 16. It was widely anticipated to increase. Also, automobile sales have improved as economy steadied.

But those could well have been outliers. A September 21 report by U.S Department of Labor, noted that for the month of August, 26 states and the District of Columbia posted unemployment rate decreases from a year earlier, 21 states reported increases and 3 states had no change (see here). The national jobless rate was nearly unchanged in August at 9.6 %, from a year back. A wobbly banking system then could just make it harder for the economy to crawl out of its hole.

There are clear benefits to this financial Darwinism. The clean-up will eventually create fewer, safer and more stable financial entities.

The downside: pain of cleansing. Bank failures could create more job losses and erode confidence of the investing public in the short term, which is anyway drawing rock-bottom 0.05-0.5 % interest on their deposits.

Is there a silver lining to any of this? Well, yes. FDIC says the total assets of “problem” institutions have declined from $431 billion to $403 billion.

Thanks for writing in, Katya.
Yes, there will be fewer banks now. If these banks are well capitalized and loaded with deposits, they can service the economy well whenever growth picks up -- even if they are fewer in number. The only flipside is that banking assets will be more concentrated in fewer hands.
As for the historically consumption-driven US mkt, habits have already begun changing. The domestic savings rate is at unsually high levels of 6.2%.